WASHINGTON – The Interior Department said Wednesday it is ending a controversial program that allows companies to give the government in-kind payments instead of cash for oil and natural gas taken from federal land and waters.

The royalty-in-kind program has been criticized for lax enforcement that has cost the federal government tens of millions of dollars in royalty payments. It also was at the center last year of a sex and drug scandal involving employees of the office in charge of Interior's offshore energy leasing program.

Interior Secretary Ken Salazar said the program "has been a blemish on the department" and has "created problems and ethical lapses" among those who managed it.

"It's time for us to end the royalty-in-kind program," Salazar told a House hearing, promising to phase out the program in an orderly manner in favor of cash collections. About half of the more than $12 billion in oil and gas royalties are collected through the in-kind program.

Under the program, instead of cash, companies provide the government a comparably valued amount of oil or gas. Then the government sells the products on the open market.

Ending the in-kind program is the first step in a broader overhaul planned by Salazar of the leasing program.

"Bravo, bravo, bravo," responded Rep. Nick Rahall, D-W.Va., chairman of the Natural Resources Committee and a sharp critic of the leasing program and the way it's been managed. Rahall said a return to cash royalty payments "will end the opportunity for mischief, or the temptation, and perhaps provide a more decent return for the American taxpayer."

Rahall said a General Accounting Office report, to be presented in later testimony, estimated that the federal government may have lost as much as $160 million in royalties from oil and gas taken from offshore waters because of erroneous and missing information provided by oil and gas companies. Another GAO report released this week said the government may be owed $21 million — and risks losing millions more — because Interior officials are not adequately verifying how much companies produce from offshore leases.

It was not clear how much of the lost revenue was attributed directly to the in-kind payments.

The government in fiscal 2008 collected more than $12 billion in royalties from oil and gas production in federal coastal waters, mostly in the western Gulf of Mexico, of which $6.6 billion came through the royalty-in-kind program, according to the General Accounting Office. The Interior Department had somewhat lower numbers for the in-kind program, but does not include oil that is collected, but goes directly to the government's Strategic Petroleum Reserve.

The oil industry has favored the in-kind approach, which was significantly expanded during the Bush administration.

"The program is an effective means of ensuring that the American people receive fair compensation for development of federal resources," said Jack Gerard, president of the American Petroleum Institute, which represents the large oil companies.

"Terminating this straightforward method of handling royalty payments runs the risk of raising administrative costs and adding additional layers of paperwork required to determine the value of oil and gas production," Gerard said in a statement.